Antitrust Suit May Proceed Against American Airlines : ‘Direct Evidence’ of Monopoly in Ticketing System Cited

A federal judge has found “direct evidence” that the nation’s largest operator of computerized airline ticketing systems, American Airlines, has exercised lucrative monopoly power over the airline ticket reservation market, and he allowed 12 smaller carriers to proceed with a $300-million antitrust suit.

In a decision handed down late Friday in Los Angeles, U.S. District Judge Edward Rafeedie also found evidence of predatory price-cutting and price discrimination in American’s SABRE reservation system, one of the giant computer databases that now deliver the vast majority of all airline tickets sold in the United States.

The opinion narrows significantly the remaining legal issues in a long-running battle among the nation’s air carriers over access to the two largest ticket reservation systems, American’s SABRE system and United Airlines’ Apollo network, which now account for about 60% of all airline tickets sold and more than 75% of the nation’s computerized ticketing revenue.

Other airlines, which pay fees for tickets booked through the systems, complain that American and United are abusing their domination of the market by charging exorbitant fees and imposing restrictions on travel agents who use their booking systems that make it difficult or impossible for agents to switch to rival systems.

Some Claims Rejected

American and United contend that their fees and contract requirements are fair compensation for the millions of dollars they have invested in the intricate, nationwide databases that search through thousands of airlines and routes and print out an airline ticket instantly in any travel agent’s office. American alone has $400 million invested in the SABRE system.

The judge’s decision fell short of holding as a matter of law that American has engaged in anti-competitive behavior, leaving those issues for a jury to decide, and it dismissed outright claims that American violated antitrust laws by withholding competitors’ access to an essential industry facility.

The decision also rejected claims that American’s rival for dominion in the computer reservations market, United Airlines, held any monopoly power over the national air transportation market through its Apollo reservations system, though it left open the possibility that United may have exercised a limited monopoly over the national market for computer reservation services to travel agents and airlines.

Both American and the smaller carriers claimed a measure of victory because the decision narrowed grounds upon which the database operators can be sued at the same time that it allows some of the smaller carriers’ most important claims to be submitted to a jury.

“We’re pleased that our legal theory has been judicially vindicated, and we have an opportunity to try these charges against these defendants,” said Maxwell M. Blecher, a lawyer for USAir, one of the carriers challenging American and United’s domination of the computer reservation market.

“I don’t want to sound melodramatic, but the future of air transportation could depend on whether American and United in the future will have the right to charge some unlimited amount of money for access to these systems,” Blecher said.

Lawyers for American Airlines said the “vast majority” of the opinion is favorable to them, particularly the court’s rejection of the idea that American and United restricted access to an essential facility or engaged in inappropriate “monopoly leveraging” by gearing their computers to favor their own flights.

“On balance, we’re very pleased with the outcome. To the extent the judge did not agree with us, all he’s said is the plaintiffs have raised enough of a factual issue that he’s not going to decide this by motion (without a jury trial),” said American’s lawyer, J. Edd Stepp Jr.

Fallout of Deregulation

Stepp said the court appeared also to have “narrowed significantly” the potential for damages in the case.

USAir and a variety of other carriers that first filed suit challenging American and United’s dominion of the market--including Northwest, Republic, Midway, Western and PSA--have sought $300 million in damages. Texas Air and its subsidiary airlines, including Continental, have in the past calculated damages to competing carriers as high as $800 million, Blecher said.

The dispute is one of the major fallouts in the industry from deregulation, which saw a dramatic increase in the number and complexity of airline routes and a substantial rise in the number of airline tickets booked through travel agents.

American’s SABRE and United’s Apollo aren’t the only computer reservation systems in the market, but competing carriers argue that they control well over half the reservations market and impose exclusivity requirements on travel agents that make it impossible for competing carriers to defect to another reservations service.

Because more than 90% of all SABRE travel agents use only the SABRE service, for example, the plaintiffs argue that they would be foreclosed from those agents unless they list their flights on SABRE.

The judge countered that SABRE is still forced to make its service attractive to travel agents, particularly new agents and those whose contracts are expiring and who are not subject to the stiff restrictions American poses on agents under contract with SABRE, who seek to switch to another reservations system.

Still, the judge said the booking fees American charges for its SABRE services provide, in part, “direct evidence of the defendants’ exercise of monopoly power in the CRS market.”

According to a recent Transportation Department report, SABRE’s booking fees to other airlines averaged more than 230% of their costs for producing reservations in 1986, while Apollo’s booking fees were 192% of their costs.

Will Let Jury Decide

The court also found evidence that American engaged in price discrimination when it charged varying booking fees to different carriers, with a higher fee being charged to Delta Airlines, a competitor at American’s Dallas-Ft. Worth hub. American argued that the different prices were the results of individually negotiated contracts based on their contributions to the SABRE network.

The judge took no final position in either case, concluding that a jury could rule either way. Likewise, the judge found that “a reasonable jury could infer” that American engaged in predatory, below-cost pricing for its SABRE services for the purpose of recouping lost profits later when it gained a monopoly foothold, but the judge made no specific factual finding himself.

The decision was clear, however, that neither American nor United has wielded a monopoly power in the overall air transportation market through anti-competitive use of the reservations services, noting that both airlines still control a relatively small individual share of the nation’s air travel.

Complicated Issue

“American has never had more than a 14% share of the air transportation market. Although market share is, in itself, an insufficient indicator of market power, such a minimal share precludes a reasonable jury from finding monopolization,” Judge Rafeedie wrote.

In one of the most complicated issues presented to the court, the judge rejected the idea that American and United gained an unwarranted foothold in the air travel market by monopolizing computer reservations for air travel.

The judge did, however, concur with the plaintiff’s argument that the airlines’ past practice of highlighting their own airlines’ flights on their reservations’ systems computers, a practice known as “display biasing,” is “unreasonably restrictive of competition.”

“The consumer bears the brunt of this practice by getting a less than optimal flight, and the airline with the better flight has lost a sale it should have otherwise made,” the judge said. “This type of competitive advantage depends upon the perpetration of a fraud upon the consumer.”

The now-defunct Civil Aeronautics Board outlawed display biasing in 1984, a move that prompted the rise in booking fees about which the competing airlines are now complaining. Blecher said the competing airlines will still seek damages based on the past practice, however.